This is the next to last post about Steve Roth’s handy compilation of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] The issue this series is addressing is: Did Roth’s reference to the Great Depression help explain why welfare and redistribution saves capitalism from itself? (Discussions of other instructive aspects of the article can be found in PART I, PART II, PART III, PART IV, PART V, PART VI, and PART VII.)
As his final effort to explain why “massive redistribution . . . saves capitalism. . .” (before waxing eloquent about the goodness of “massive redistribution”—something irrelevant to proving his claim), Roth recounts an infamous leftist myth:
“Or to put it another way, and bring it right home to America: The New Deal saved capitalism from itself. . . The New Deal showed that capitalist countries could overcome the “concentration” curse. Using a host of government programs, it resurrected the mighty American market engine from the depths of The Great Depression. . . .
How did that happen? The New Deal shared the wealth in manifold and diverse manners, using a plethora of government programs, rules, and institutions.”
Roth’s story is a myth – that is, “a traditional story, especially one concerning the early history of a people or explaining some natural or social phenomenon, and typically involving supernatural beings or events.” The supernatural hero of this historical story is FDR. “Roosevelt’s combination of confidence, optimism and political savvy – all of which came together in the experimental economic and social programs of the ‘New Deal’ – helped bring about the beginnings of a national recovery.”[ii] With his trusty pen, gift for fireside gab, intelligence, patrician can-do spirit, and faith in government and its experts, FDR banished Hooverism (“do-nothingism”) from the land and brought prosperity to the land.
Part of this story is a myth of the “widely held but false belief or idea” kind; i.e., it is epically incorrect. Hoover was a life-long advocate of active involvement by the government in the economy.
“Pulitzer-Prize winning historian David Kennedy summarized Hoover’s work in the 1920-21 recession this way: ‘No previous administration had moved so purposefully and so creatively in the face of an economic downturn. Hoover had definitively made the point that government should not stand by idly when confronted with economic difficulty.’[iii] (Harding, and later Coolidge, rejected most of Hoover’s ideas. This may well explain why the 1920-21 recession, as steep as it was, was fairly short, lasting 18 months.)”[iv]
Unlike Harding and Coolidge in 1920-21, Hoover did not stand idly by after the 1929 stock market crash.
“In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt’s advisers knew that Hoover had started the New Deal. One of them wrote, ‘When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself.’”[v]
Nevertheless, using the word “myth” with respect to the plausibly true aspects of the FDR’s New Deal saved the day story is somewhat of an overstatement. History, especially economic history, is subject to selection and interpretations of the facts that historians choose to emphasize or ignore in order to reach (usually preconceived and desired) conclusions. Certainly, a story weaving together factoids about what happened before, during, and after the Great Depression coupled with enough wishful thinking can be spun into a plausible history that appears to support Roth’s claim. Had Roth wanted to cite scholarly support for his interpretation (“myth”), he had an abundance of scholarly work from which to choose. (By “scholarly” I’m referring to work done by people who are legitimately considered to be scholars. Inasmuch as a scholar’s job includes disproving faulty work of other scholars, saying that a work is scholarly says nothing about whether the work is objective or true.) Much FDR hero worship is of recent vintage (that is to say, since the near universal rejection by economists in the 1970s of the Keynesian myth).[vi] There is also, however, an abundance of scholarly work that takes great exception to or outright rejects Roth’s narrative about the Great Depression. This includes the work of at least four Nobel laureate[vii] economists.[viii] The proper question for the critical thinker is, “Which version of history is the most credible?”
It should be noted in passing that, although it could never be proved, there may be some merit in the argument that FDR’s actions “saved America from socialism,”[ix] i.e., that FDR may have saved America from a revolution that would have resulted in outright socialism. That claim, however, would not have supported his thesis.[x] And neither does Roth make an argument similar to the one made by GWB when he said, “I’ve abandoned free market principles to save the free market system.” Bush thought that he was enabling capitalism to flourish later. Roth espouses a permanent abandonment of the free market principles as massively as possible without killing capitalism.
Let’s continue exploring Roth’s interpretation of New Deal history.
I suspect that everyone reading this has heard the New Deal “history” to which Roth referred. That story is told in the textbooks of schools and universities that are either part of the government or supported by and in symbiotic relationships with the government. Because those institutions comprise the vast majority of schools, essentially all textbooks tell that superficially plausible tale.
I also suspect that, unless you are particularly interested in history and economics, you have not heard much, if any, of why you should either doubt or reject that interpretation. Which interpretation is the more compelling interpretation?
After the stock market crash of 1929, a stark battle among scholars ensued as to what the government should do. The leading antagonists were John Maynard Keynes and Frederick Hayek.[xi] Keynes supported massive government spending and greater government involvement in and control over the economy. “Keynesianism” was opposed by many economists at the time and since. Keynes never became a Nobel laureate, but Hayek did. In addition to the four Nobel laureates mentioned above, many economists[xii] take great exception to or reject outright much of Keynesianism. After 50 years of studying the Great Depression, Keynesianism had been “fully discredited”[xiii] by the 1980s. (Why it has come back from the grave will be the topic of the next, possibly last, post on Roth’s article.)
It must be acknowledged that at least one Nobel laureate economist, Paul Krugman, disagrees with Friedman’s interpretation of the Great Depression history. In particular, Krugman claims Friedman is confused about the Great Depression[xiv]—while other scholars claim Krugman’s analysis is flawed.[xv] (For what it is worth, I believe that Krugman is a formerly great economist who is now willing to trade sound economics for fame and being part of the in crowd—and he possibly has some more worthy goals, e.g., placating the mob he believes will tear the whole thing down without massive redistribution. I’m not alone in believing Krugman’s punditry is not good economics.[xvi]) The thing to be noted, here, is that “the experts” do not agree about the supposed “lessons learned” from the Great Depression history.
As discussed in PART VII, Roth’s perpetual “massive redistribution” is not supported by Keynesianism—the ideas underlying the New Deal. Krugman puts it this way: “Although Keynes was by no means a leftist—he came to save capitalism, not to bury it—his theory said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government intervention in the economy.”[xvii] Keynes’s prescription was to medicate capitalism so that it could thrive when the economy was strong enough to let it; Roth’s prescription is to massively suck the life blood out of the body whenever possible.
Roth’s claim that perpetual “massive” spending saves capitalism from itself was also clearly rejected by Henry Morgenthau, FDR’s Treasury Secretary. After eight years of FDR’s attempts to pull the country out of its economic depression with spending, Morgenthau said in 1939:
“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot.”
In other words, the guy closest to FDR’s spending said that Roth’s citing of the Great Depression as support for his faith in spending is ill-founded.
We also know that, since 1880, the U.S. has experienced 27[xviii] economic panics and recessions, one of which was the “Great Recession” (starting in 2007) and one “Great Depression”[xix] (1929-1938). By my count, the Great Depression lasted 107 months, and the Great Recession 18 months (and by many people’s reckoning, about 10 years). Both of those events were accompanied by massive government involvement in the economy prior to and, at least in part, inducing the crash as well as massive efforts to fix the problem after the crash. Neither went well.
By contrast, the average recovery time for the other panics and recessions since 1980 is just over 14 months. Government efforts to fix the economic problems of those events were relatively much smaller. The recession following the much more massive crash of 1920 (caused primarily by soldiers not being able to find jobs when they returned from WWI) lasted only 18 months. Both believing in free markets, Presidents Harding and Coolidge did essentially nothing to turn the economy around—and kick-started the “Roaring Twenties.” (While Coolidge’s parsimonious fiscal policies facilitated healthy organic economic growth, the fairly young Federal Reserve, thinking its experts had things figured out, flooded the economy with currency that created bubbles that burst with the crash of 1929.[xx])
What is usually left out of the FDR story is that government “doing something” automatically has negative consequences and that the more things it does, the greater the negative consequences are. FDR infamously said, “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.” On the surface, that comment makes sense. On the other hand, consider this comment from the perspective of a business executive. To launch a new venture or product, an executive must attempt to predict the future demand for it, cost of raw materials, labor, taxes, regulations. . . The more predictable the future is, the lower the risk of investing in the project and the higher probability capital can be raised to proceed. This is a difficult task when the government and the economy is relatively stable. It becomes near impossible when government is constantly failing and trying new “somethings.” “Regime Uncertainty”[xxi] always suppresses investment and growth. The more government activity there is, the more uncertainty. So, for a government’s “something” (much less, many “somethings” at once) to be net positive, its positive consequences must be greater than its negative consequences. When the government is messing with the economy, that becomes almost impossible to achieve. (And with many things being tried at once, it becomes nearly impossible for economists to figure out what worked and what didn’t.)
Macroeconomics (the “branch of the economics field that studies how the aggregate economy behaves”) is a wonderful science, chock full of fantastic insights. What economists know and theorize is astoundingly interesting and complex and often very useful in identifying what not to do. It is especially wonderful in conjuring theories as to what might be true and what might make things better. On the other hand, the sad truth is that truly understanding how the economy works and how to predict, prevent, or cure economic booms and busts is still beyond the grasp of humans—and may always be. The Great Moderation (1980-2007) indicated that humans are making progress in understanding some things about the economy, but the events leading up to the crash of 2007 indicate that humans are far from knowing enough to avoid economic disasters (and/or that humans cannot help themselves from making bad collective decisions when they do or could know better). Paul Romer, the Chief Economist and Senior Vice President of the World Bank, describes the current state of macroeconomics as “a math-obsessed pseudoscience.”[xxii]
We must realize, however, that even if economists did know exactly what the government should do, the government would neither follow the plan nor flawlessly implement it. No legislation relating to the economy is free of crony provisions (siphoning) to fund politicians’ campaign coffers or burnish politicians’ popularity back home and bureaucratic implementation and enforcement—mostly by self-interested, minimally motivated, and marginally competent administrators in one or multiple bloated agencies. What comes out the back end of this process usually bears only a vague resemblance to the economically advised plan—but it will have a title that sounds really good to a majority of voters (who know or understand only a tiny fraction of what the economists advised; Jonathan Gruber comes to mind).
We need not despair, however. As history has shown, economies recover whether or not the government “does something” in an attempt to fix a recession, though much of what the government has done made things worse than they needed to be. That is to say, for whatever reason, things tend to get better faster when governments do the precise opposite of what Roth suggests should be done, i.e., what FDR did.
By and large, the public is ignorant of the counterarguments and facts that reveal the extremely shaky ground on which Roth stands. That an uneducated public sees Roth as standing on terra firma when making fanciful claims about history is a testament to how our government institutions, especially our educational institutions, are failing the citizenry. Why that is the case will be addressed in the next part of this series and hopefully will add to the reasons to doubt Roth’s interpretation of history.
[iii] David M. Kennedy, Freedom From Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, p. 48.
[vi] “When the initial expenditures failed to eliminate unemployment and were followed by a sharp economic contraction in 1937-38, the theory of “secular stagnation” developed to justify a permanently high level of government spending. The economy had become mature, it was argued. Opportunities for investment had been largely exploited and no substantial new opportunities were likely to arise. Yet individuals would still want to save. Hence, it was essential for government to spend and run a perpetual deficit. The securities issued to finance the deficit would provide individuals with a way to accumulate savings while the government expenditures provided employment. This view has been thoroughly discredited by theoretical analysis and even more by actual experience, including the emergence of wholly new lines for private investment not dreamed of by the secular stagnationists.” Milton Friedman, Page 67 of “Capitalism and Freedom.” (If you find my writing interesting, you would be hard-pressed to find a more interesting book than “Capitalism and Freedom.”)
See also Paul Krugman’s confirmation that Keynesianism had been discredited (“fell into disfavor”) among economists. “And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.” [Emphasis added.]
See also Christina Romer (an economist who believes the multiplier of “stimulus spending” is greater than 1—she’s a leftist who supports high levels of government involvement in the economy), who warned policymakers to learn “The lessons of 1937.” While I believe some of the lessons she learned from 1937 just ain’t so, she concluded (relying heavily on Milton Friedman and Anna Schwartz) that the federal government made two large mistakes in 1937 that extended the depression—i.e., that the government action hurt more than it helped.
Robert Lucas and Thomas Sargent referred to “the spectacular failure of the Keynesian models in the 1970s.”
[vii] This is not to suggest the Nobel committee always make sound judgments. The Nobel committee (like all committees, institutions, and governments) is comprised of fallible humans. It is only to suggest that the views I am urging are not from tinfoil hat rabble rousers.
[viii] Friedrich August Hayek (“Road to Serfdom”), Milton Friedman (see endnote vi), Vernon Smith (“Now, everyone believes we got out of the Great Depression because of Second-World-War spending. That’s the common explanation. And many economists have studied the effect of deficit financing on the recovery, but it’s basically ineffective”), and James Buchanan (“…by employing deficit spending and increased state intervention President Obama will ultimately hamper the long-term growth potential of the US economy and may risk delaying full economic recovery by several years”) clearly believed that the statement that “FDR saved the economy” with spending and involvement in the economy is false.
Although I did not find a discussion of George Stigler’s views about the history of the Great Depression, he “published ‘The Theory of Economic Regulation,’ in which he argued that regulation generally arises from the self-interested political activity of organizations that desire to be regulated. That seminal essay triggered a major research program in the economics of regulation.” Based on this statement alone, one could reasonably conclude that he did not believe FDR was the hero of any story.
While I have not found anything directly on point with respect to Gary Becker (a friend, colleague, and coauthor with Friedman) or Thomas Sargent (known for his “rational expectations”—a virtual impossibility when government is constantly changing the rules and imposing new policies as FDR did), there is good reason, based on what I have found, to believe that they do not buy into the argument that Keynesian economics saved the day during the Great Depression.
[x] “Saving the country from socialism” should not be confused with the possibility that what FDR did was economically advantageous. To illustrate, assume that the Fed, Hoover, and FDR policies were economically disadvantageous (e.g., turned what would have been a run-of-the-mill recession following a bust into the Great Depression—which I, and many people who are wiser and more learned than me, believe was the case), but were necessary to subdue the collectivist belief of the vast majority of the economically illiterate public that the governments must “do something” (to put down a revolt). In other words, assume that the New Deal suppressed growth in everyone’s standard of living, but also prevented a revolution. That the New Deal policies saved the country from succumbing to even worse policies that the mob would have imposed does not support Roth’s suggestion that massive redistribution improves the economy.
Mike Munger’s comments in an interview on the subject are particularly compelling:
FRANK STASIO: If the government stimulates the economy though, through spending programs, doesn’t that create, doesn’t that generate wealth, doesn’t that generate money that can be circulated through the system and then ultimately strengthen the economy?
MICHAEL MUNGER: “The problem with that reasoning, and it could be true, but it just isn’t necessarily true. The problem with that reasoning is something that I’ve called, I’ve said that US Policy is daft, and what I mean by daft is that deficits are future taxes, and so what we see is that government spending that is deficit financed. We’re taking money, either from current tax payers, or worse from future tax payers who have no voice in it, and we’re spending it. The question is what are we spending it on? Well, if we are spending it on current services so that we are not actually paying for the amount of services that we’re getting, that’s not going to create growth, that’s not going to create jobs. All it is, is a drag on future generations. What we are not doing is spending it on infrastructures, railroads, education. If we were doing those things then yes, perhaps it would create jobs over the long term.”
[xiii] See endnote vi.
[xvi] Richard Posner (someone with whom I disagree on many things) says this of Krugman: “It really demeans the profession. Krugman is obviously a good economist. He’s got this book, “The Return of Depression Economics.” It’s very good… But his column for The New York Times is really irresponsible, nasty. Sometimes on his blog he makes accusations. In one of his columns, he suggested that conservatives were traitorous. He used the word “treason.” I’m bothered by that. If you have a very politicized academic profession, you lose your confidence in their objectivity.”
[xix] Some, including the current Wikipedia page (see endnote xviii), claim that the economic crash of 1920 was a “depression.” The decline in employment and the GDP was certainly much greater than during the Great Depression. Myself and others, however, classify it as a “recession” because of its short (18 month) duration and the extended boom (the “Roaring Twenties”) that followed (which contrasts sharply with the Great Depression and the Great Recession).
Some, including the current Wikipedia page, say that the Great Depression lasted from 1929 until 1933, followed by a recession in 1937-38. Others, including me, say it lasted about 10 years, starting in 1929. The Wikipedia page also says that the Great Recession lasted only 18 months. While I have accepted that, many people who lived through it are still feeling its lasting effects, and growth has been languid so far.